Question

Ron and Hermione formed Wizard Corporation on January 2. Ron contributed cash of $280,000 in return for 50 percent of the corporation’s stock. Hermione contributed a building and land with the following fair market values and adjusted bases in return for 50 percent of the corporation’s stock:

To equalize the exchange, Wizard Corporation paid Hermione $140,000 in addition to her stock.

Assume Hermione’s adjusted basis in the land was $420,000.

h. What amount of gain or loss does Hermione realize on the formation of the corporation? What amount, if any, does she recognize?

Assume Hermione’s adjusted basis in the land was $420,000.

i. What adjusted basis does Wizard Corporation take in the land and building received from Hermione?

Answer 1

As the adjusted basis of building is not given in the question, we are assuming
adjusted basis of land as the adjusted basis of the land and building
Fair market value of the stock received	$280,000
Add: cash received	$140,000
Amount realized	$420,000
Less: Adjusted basis of property transferred	($420,000)
Gain/(loss) realized	$0
Hermione will not realize any gain or loss in this transfer
i. The corporation will take the same adjusted basis in the property transferred as the
transferree had reduced by the amount of any gain realized on the transfer.
Adjusted basis of the property transferred	$420,000
Less: Gain realized	$0
Adjusted basis of the property	$420,000